Start an S Corporation in Ohio

As a prospective small business owner, determining what business entity you want to create is one of your first decisions. From there, you have to work out your tax structure. That’s where creating an S corporation in Ohio may be beneficial.

This article digs into what an S corporation (S corp) is and why you may want to apply for S corp status.

S Corporation in Ohio: Key Points

• An S corporation is a tax classification, not a business entity or structure.

• S corp tax status allows businesses to pass revenue and losses to their shareholders under a pass-through model.

• You must form an LLC or corporation before applying for S corp status with the IRS.

What Is an S Corporation?

An S corp is a pass-through tax entity that allows businesses to pass revenue and losses to their shareholders. As a result, the business pays no corporate taxes on its revenue. Instead, the IRS collects tax from each shareholder based on their personal tax returns.

In many ways, this makes S corps similar to limited liability companies (LLCs). Both are pass-through entities, though they differ in structure and membership.

Furthermore, S corps are similar to C corporations (C corps), especially regarding corporate governance and having shareholders. However, an S corp comes with multiple tax benefits, assuming you meet the criteria for having an S corp.

Those benefits mostly relate to taxation, as mentioned. And therein lies another important point. An S corp is not a business entity. Instead, S corp status is a form of tax classification that the IRS, and the state of Ohio, use to determine how it taxes your company’s profits.

Tax Considerations for an S Corporation in Ohio

As S corp status is a tax classification rather than a business structure, it helps to understand the specific tax treatment offered to S corps.

Ohio Tax Treatment of S Corporations

Ohio recognizes S corps similarly to the IRS, meaning the business itself isn’t subject to double taxation. In other words, your S corp doesn’t pay corporate taxes on its income.

Instead, each pays income taxes on the money that passes through to them via the business. Beyond federal income taxes, you must also pay Ohio’s income tax rate between 0% and 3.99%, depending on how much you earn.

Ohio operates on a graduated income tax scale, meaning you’ll pay a higher percentage of state income tax if you earn more.[1]

Ohio Franchise Tax for S Corporations

Unlike many other states, Ohio charges set franchise taxes to S corps.

A standard S corp must pay the state 1.5% in franchise taxes. This tax applies before the income tax each shareholder states on their tax return.

The percentage increases for financial S corps, which face a 3.5% corporation franchise tax burden.[2]

Pass-Through Taxation

With a typical Ohio corporation, you pay taxes at the business level on all income your company generates. After paying those taxes, the money gets distributed to shareholders and employees, who then pay income tax on their earnings. Your company and its people are essentially taxed twice on the money the business earns.

The S corp structure means you don’t pay corporate taxes on business income.

Only the revenue passed on to shareholders and employees is taxed at the personal income tax level. You may also pay self-employment tax on these earnings if you have a sole proprietorship or single-member LLC with the S corp structure.

Requirements for Forming an S Corporation in Ohio

Achieving S corp status in Ohio isn’t a simple case of completing a form and having the status granted. You must meet several conditions created by the Internal Revenue Service (IRS) to form an S corporation:[3]

• Be a domestic corporation

• Have a single class of stock

• Have no more than 100 S corporation shareholders

• Have only shareholders who are individuals, estates, or certain types of trusts 

Partnerships, non-resident alien shareholders, and corporations can’t be shareholders in an S corp. Furthermore, you likely won’t be able to create an S corp in Ohio if you operate a financial institution, insurance company, or domestic international sales corporation (DISC).

Contrast these requirements with those required to form a limited liability company, and you can see they’re more restrictive. If you’re struggling with obtaining S corp status, Swyft Filings can help you comply and ensure you meet the IRS’s requirements.

Filing as an S Corp in Ohio

Due to S corp status being a tax classification, you must file for it alongside filing to create your business, assuming you don’t already have a company.

As a result, a new entrepreneur who wants to create an S corporation in Ohio has to go through the steps of setting up their business first. This six-step process walks you through the whole thing.

Step 1: Choose a Business Name

Your company’s name has to be unique from any other used by an Ohio business. It must also be memorable and “distinguishable on the records” of the Ohio Secretary of State.

Let’s assume you’ve come up with a name. The first thing to do is conduct a business name search to check if the name is already in use in the state. You can ensure you don’t make mistakes or accidentally use another Ohio company’s name with our free business name search.

If your desired name is available, you can reserve that name for up to 180 days by filing a Name Reservation form.[4] This filing isn’t a legal requirement. Still, reserving your name gives you some time as you do everything else needed to set up your S corporation in Ohio.

Once you have your name reserved and you’re confident you’ll use it, file a trademark on the name using the Trademark and Service Mark Application form.[5] It costs $125 to file this form, though that fee is a drop in the ocean compared to the cost of a legal team if you enter a trademark dispute without documentation.

Step 2: Appoint Directors and a Registered Agent

One of the key differences between filing for an LLC and filing for S corp status is that you have to elect S corp directors.

These directors make up the board that runs your business. They’re typically a small group of your S corporation shareholders responsible for setting up your corporate structure and creating bylaws.

Once you have your board in place, you need to assign a registered agent to your business.

An Ohio registered agent is called a “statutory agent,” though their responsibilities are the same. Your statutory agent is responsible for the following:

• Receiving legal documents, such as service of process, and communication from the Ohio Secretary of State, on your company’s behalf

• Maintaining a physical address that’s registered with the Secretary of State

• Keeping regular business hours to ensure they’re available to receive mail

• Sending mail to the business owner, with some services offering advice on what to do next

You can serve as your own registered agent in Ohio, which helps your business to save money. However, doing so comes with the following drawbacks:

• Dealing with all of the admin that comes with the statutory agent role

• Keeping your address on the public record, which opens you up to receiving spam and other undesirable mail

• Receiving sensitive legal documents in front of clients or colleagues

Many Ohio businesses choose a third-party registered agent service, such as Swyft Filings, to avoid these issues. Our registered agent service handles a statutory agent’s responsibilities and provides you with 24/7 access to an online dashboard where you can access any documents your business receives.

Step 3: File Articles of Organization

With your name decided and a statutory agent chosen, it’s time to create your business. To do that, you must submit forms and a filing fee to the Ohio Secretary of State. These forms register your business with the state and are used by the state for information purposes.

When forming an LLC, you must submit the Articles of Organization.[6] For a corporation, you need to submit Articles of Incorporation.[7] The forms are similar, with both asking for information about your business. You’ll also pay a $99 filing fee, regardless of which form you complete.

However, the Articles of Incorporation also ask for information about your directors.

You can submit these forms online via the Ohio government’s business filings portal or send them via mail to the following address:

P.O. Box 670

Columbus, OH 43216

After a successful filing, you should receive a Certificate of Formation. Ohio LLCs and corporations don’t have to file annual reports with the state, assuming you don’t have a non-profit or limited liability partnership.[8]

Step 4: Create an S Corp Operating Agreement

You might want to create an operating agreement if you’re creating an LLC that will become an S corp. This isn’t a legal requirement. Ohio doesn’t require LLCs to file operating agreements. However, it’s recommended that you create one for your business.

An operating agreement allows you to solidify the bylaws under which your company operates. You can also use it to document how much of the business each shareholder owns, as well as their roles and responsibilities.

The agreement is also helpful for dictating what happens with the business if a member leaves or transfers their ownership rights.

Business owners with operating agreements also don’t have to worry about the state applying its own rules to the business in governance issues.

Step 5: Apply for an Employer Identification Number

An Employer Identification Number (EIN) is a nine-digit ID number that the IRS uses to identify your business for employment taxes. Think of it like a social security number for your S corp.

You need an EIN if your company has any employees. But even if it doesn’t, it’s a good idea to get an EIN for the following reasons:

• Boosts your credibility among customers and other businesses

• Allows you to open a business banking account

• Prepares your business to scale and hire employees

We’ll obtain an EIN on your behalf so you don’t have to handle the paperwork, or you can apply via the IRS website.

Step 6: File Form 2553 for S Corporation Election

The previous five steps help you to get your business up and running. Now, it’s time to file for S corp status, which starts when you file Form 2553, Election by a Small Business Corporation.[10]

As the form’s name implies, you’ll use the form for the S corporation election. That involves demonstrating that you’ve followed the conditions to form an S corp and sharing details about your shareholders. Assuming the IRS grants your application, your business entity will begin operating under S corp status.

You can submit Form 2553 either in the tax year before the one in which you want S corp status or two months and 15 days into the current tax year. 

Suppose you have an LLC and you miss this deadline. In that case, you can file Form 2553 alongside Form 8832, Entity Classification Election, to turn your LLC into a corporation and file for S corp status simultaneously.[11]

Ohio S Corp vs. Ohio LLC

S corp status has advantages over C corp status for small businesses, especially concerning double taxation. But an Ohio LLC owner may wonder why they should bother going down the S corp route if both structures offer pass-through taxation.

The decision depends on which of the below pros and cons apply most to your business.

Advantages of Starting an LLC in Ohio

• Create and manage an LLC easier than an S corp

• Benefit from pass-through taxation with an LLC, only without the controls over how you run your business that come with an S corp

• Grow as large as you want to grow, whereas an S corp is limited to 100 shareholders

Disadvantages of Starting an LLC in Ohio

• Limited liability, meaning a judge can rule that your personal assets aren’t protected in certain cases

• Complete dissolution if members leave an LLC 

• Restricted management, as you can’t freely transfer ownership of an LLC

Advantages of Forming an S Corporation in Ohio

• Access simple profit and loss allocation based on ownership percentages.

• Treat owners as employees and access better self-employment tax treatment than an LLC

• Transfer ownership easily

Disadvantages of Forming an S Corporation in Ohio

• Long-winded election process that comes with many restrictions

• Obligated to issue stock, adopt bylaws, and maintain a board of directors

Ready to File for S Corp Status in Ohio?

Business owners have to choose the appropriate entity for their companies. This usually comes down to a choice between LLC or S corp status for small business owners. Swyft Filings can help you to create both, overcoming S corp limitations in the process.

If you want to create a limited liability company, our team handles the paperwork and filing requirements on your behalf. For those who want to create an S corporation in Ohio, we can start the process to achieve S corp status in as little as 10 minutes. Get in touch today to find out how we can help you create an S corporation.

Frequently Asked Questions

What is an S corporation in Ohio?

An S corporation is a tax entity that some small businesses can use to prevent double taxation on revenue.

Does Ohio recognize S corporations?

Yes, Ohio recognizes S corporations as legal entities.

What is the turnaround time for filing for S corp status with the IRS?

It can take the IRS as long as 60 days to approve an S corp filing, though it’s usually much quicker.

What is the difference between an S corp and an LLC?

There are several differences, particularly in the areas of governance and the limitations in play for forming each entity.

What are the requirements for an S corporation in Ohio?

An Ohio S corporation must meet the IRS’s criteria for forming an S corp.

Are taxes for LLCs and S corps the same?

Though both are pass-through entities, you can pay lower self-employment taxes with an S corp than with an LLC.

What is the S corp tax rate?

Companies with S corporation status don’t pay business taxes on corporate income. Instead, you pay federal and state income taxes on the money you receive from the business.

How do I dissolve an S corporation in Ohio?

Depending on the company’s structure, Ohio has several forms for dissolving a business. You can find these forms on the Ohio Secretary of State website.

Bibliography

1. Tax Foundation. “Taxes in Ohio.” Accessed March 13, 2023.

2. Ohio Department of Taxation. “Corporation Franchise Tax. “Accessed March 13, 2023.

3. Internal Revenue Service. “S corporations.” Accessed March 13, 2023.

4. Ohio Secretary of State. “Name Reservation/Transfer/Cancellation.” Accessed March 13, 2023.

5. Ohio Secretary of State. “Trademark and Service Mark Application.” Accessed March 13, 2023.

6. Ohio Secretary of State. “Articles of Organization for a Domestic Limited Liability Company.” Accessed March 13, 2023.

7. Ohio Secretary of State. “Initial Articles of Incorporation.” Accessed March 13, 2023.

8. Ohio Secretary of State. “Frequently Asked Questions.” Accessed March 13, 2023.

9. Internal Revenue Service. “Apply for an Employer Identification Number (EIN) Online.” Accessed March 13, 2023.

10. Internal Revenue Service. “About Form 2553, Election by a Small Business corporation.” Accessed March 13, 2023.

11. Internal Revenue Service. “About Form 8832, Entity Classification Election.” Accessed March 13, 2023.